Australia's economy on the up in 2014?

Signs of a recovery in consumer spending growth and an increase in first-home buyer demand

Charlie Nelson
19 November 2013

 Interest rates have been falling for two years and economists have been surprised that low interest rates have been slow to lift consumer spending growth and housing construction:

“Domestic demand for goods and service is currently the worst it has been for many decades, despite a historically low cash rate” (Bill Evans, Westpac Chief Economist, Australian Financial Review, 25 July 2013).

Over the past 10 years, Foreseechange has developed Consumer Pulse psychological indicators of consumer spending which provide insights into why this long slump has happened.  It has mainly happened because of a mid-2010 steep lift in consumer determination to build savings.  Now this determination has leveled out and there are signs that significant numbers of savers will have reached their savings goals over the next 12 months.

Young adults (18 to 29) and older adults (65+) especially lifted their determination to save.  Most young adults have been saving for a house, a car, or a holiday.  Older adults have been saving for retirement, a holiday, or to repair their financial situation following losses during the GFC.

With significant numbers now close to reaching their saving goal, it will not be long before we see a lift in consumer spending volumes and in first-home buyer demand.

Given that consumer spending represents over 50% of GDP and that housing construction may soon emerge from the doldrums, there is a prospect that Australia’s domestic economy will grow more strongly than over the past 12 months.  This would be good timing given the recent peaking of the mining construction boom.

Other good signs for stronger consumer spending include rising asset prices.  House prices have increased by over 7% over the past year, and the ASX200 is up by 20%.  Asset prices have a significant impact on consumer spending growth, particularly on durable goods.

There are still some negative signs.  Household income growth is slower than average and consumers believe that unemployment will rise.  But a stronger domestic economy will have the virtuous effect of increasing employment – which has been static since February 2013.  This will, in turn, grow income and reduce fears of unemployment.

The detailed report is available at the foreseechange online shop.